Whole Foods’ revenues increased by around $5 million in the first quarter of 2016; rising from $15.55 billion in December 2015 to $15.6 billion in March. Yet its income fell by $16 million during the same period, dropping from $526 million to $510 million. To make matters worse Whole Foods revenue dropped significantly over the past year. It was $604 million in March 2015 and $510 million a year later.

This could indicate that the income is not expanding to cover the costs of Whole Foods’ recent expansion. Another problem could be the aggressive competition from deep discounters like Sprouts, Trader Joe’s, Aldi, Kroger (NYSE: KR) and Walmart Stores Inc. (NYSE: WMT) in the organic sphere.

Low Income Growing Revenue

Sprouts was in a little better shape; its net income did grow by $8.74 million in first quarter, rising from $128.99 million in December to $137.73 million March. During the same period Sprouts’ revenues increased by $136 million; rising from $3.593 billion in December to $3.729 billion in March.

Between March 2015 and March 2016, Sprouts’ revenues increased by $627 million rising from $3.102 billion to $3.729 billion. If that keeps up Sprouts’ revenues should exceed $4 billion for the first time later this year. Sprouts net income grew by $26.3 million between March 2015 and March 2016, rising from $111.43 million to $137.73 million.

It looks as if Sprouts’ deep discounting strategy is paying off, and Whole Foods’ premium strategy is not. Although the income shows us that both chains have very low margins. Despite that they have avoided the death spiral unlike TheFresh Market (NASDAQ: TFM); which reported a net income of just $65.05 million on $1.857 billion in revenue.

A potential problem for Sprouts is that its’ net income is not that much greater than the Fresh Market’s; even though its’ revenues are more than twice as large. Fresh sold itself to Apollo Global Management in March to avoid the death spiral. Disturbingly, this pattern of growing revenue and low income has been seen elsewhere in the grocery business notably at Roundy’s; which sold itself to Kroger to avoid the death spiral last year.

Where’s the Cash?

Can Sprouts and Whole Foods avoid Roundy’s and Fresh Market’s fate? The financials indicate that they might not be able to. Whole Foods in particular seems to have limited cash flow.

The high-end grocer reported a free cash flow of $290 million on $15.6 billion in revenue despite generating $995 million in cash from operations for the first quarter. To make matters worse, Whole Foods only had $848 million cash and short-term investments and $3.077 billion in liabilities.

Sprouts had a free cash flow of just $63.81 million on revenues of $3.729 billion at the end of the first quarter. It also reported $269.76 million in cash from operations and $145.65 million in cash and short-term investments. Sprouts also had $631.39 million in liabilities for the first quarter.

Are there Limits to Whole Foods’ Growth?

These numbers show us why grocery chains; like Roundy’s and Fresh, can collapse so fast. These businesses have very cash and high operating costs. To make matters worse, both Sprouts and Whole Foods have embarked on massive expansion efforts. Whole Foods is even developing its own discount grocery brand; 365, to compete with Aldi, Trader Joe’s and Sprouts.

Another problem is that Whole Foods may have hit the limits of its expansion. After all there are only so many hip urban enclaves and expensive suburbs in America. Whole Foods now operates around 1,200 stores according to Chain Store Age.

This comes at a time when Kroger is beginning to compete directly with Whole Foods in the organic arena. Another big problem facing Whole Foods has been a recent $1 billion stock buyback, which is also eating into the income. One has to wonder if Whole Foods’ growth has limits; and more importantly if it can maintain momentum after hitting those limits.

Sprouts; which currently has around 220 stores, seems to have more growth potential because it targets a middle-class clientele through deep discounting. Unfortunately Sprouts recent expansion has been in areas with intense competition. That includes Colorado; where it competes directly with Kroger subsidiary King Soopers, and Florida where Sprouts intends to challenge Publix (OTC: PUSH) on its home turf.

Sprouts Takes on Publix

Sprouts is planning to open a market in Tampa; right in the heart of Publix country, The Tampa Bay Business Journal reported. Publix; which reported $32.62 billion in revenue on December 31, 2015 is a major threat to Fresh, Sprouts and Whole Foods. Publix added $1.82 billion in revenue during 2015 – growing from $30.80 billion to $32.62 billion.

The employee-owned Publix has greater resources than Sprouts; including $1.965 billion in revenue, $2.941 billion in cash from operations and $1.729 billion in cash and short-term investments at the end of the fourth quarter 2015. This puts Sprouts at a serious disadvantage, Fresh could not compete with Publix, now Sprouts is trying the same thing.

Is Publix the Biggest Threat to Sprouts and Whole Foods?

Publix has also embarked on a rapid expansion, it is planning two stores in Virginia; in Bristol and Richmond, The Tampa Bay Business Journal reported. That’s the first new state it has entered since North Carolina in 2012. Publix is a threat to Whole Foods because it competes for some of the same customers: Millennial foodies, analyst Phil Lempert of SupermarketGuru.com told The Business Journal.

Lempert expects a massive expansion of Publix in coming years. That could be bad news for both Whole Foods and Sprouts; which lack the larger chain’s resources. Another big advantage that Publix has is a dominant position in a prosperous core market – namely Florida. That gives Publix the resources it needs to compete directly with larger well-funded rivals like Kroger.

Low margins and intense competition make both Whole Foods and Sprouts bad investments. Both of these chains will struggle to survive in a market filled with larger and far better capitalized rivals in the near future. My prediction is that either Whole Foods or Sprouts will enter the death spiral at some point before the year 2020.